DEFINITION of 'Currency Binary Option'

Currency binary options offer an all-or-nothing fixed payoff based on the exchange rate when the option expires, which can be as little as five minutes after buying the option. Binary options are really a means to speculate on currencies, rather than an investment.

BREAKING DOWN 'Currency Binary Option'

Currency binary options are a form of online gambling on currency markets, rather than investing, because unlike spot trading you lose your entire stake if the binary option is not in the money at the time of expiration. The premium on a currency binary represents the consensus odds that the strike exchange rate will be reached by expiration. To make any money, you have to be right well over half the time.

Because the odds are stacked in favor of the house, short-term volatility in currency markets makes winning consistently with binary options very difficult. No-one, not even the best professional forex traders, can know what will happen to an exchange rate in the next 10 minutes. However, binary options trading, which is a relatively new and completed unregulated market, does appeal to people who enjoy addictive gambling products, like online poker.

Currency binary options are mostly limited to major currency pairs like EUR/USD, GBP/USD and USD/YEN. Like forex spot trading, investors can start trading online with relatively small amounts of capital. For a more in-depth look at binary options, read our guide Trading Forex With Binary Options.

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